Foreign affairs: Russian roulette

Having resurrected the czarist formula of maximum empire and minimum economy, Vladimir Putin is now learning its cost as oil and the ruble tumble.

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December 21, 2014 03:51
Vladimir Putin

Vladimir Putin. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

 
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‘Ruble drops, Wall Street falls” read market reports at one point this week – in what Lenin, had he seen them, would have taken for a joke.

It was no joke. The Russian currency this week was battered the way the czarist army was trounced a century ago this year in the Battle of Tannenberg, where 150,000 Germans walloped 230,000 Russians, whose commander then shot himself in the head.

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Fortunately, the current Russian commander, President Vladimir Putin, sees no human corpses when surveying his own battlefield. It is, however, strewn with economic casualties, and they are all pointing at the leader who – in the spirit of the czarist legacy that has been his inspiration – has picked fights he could not win, and his nation could not afford.

The beating in the markets was merciless.

The Russian currency, which over the previous 23 months had already lost a third of its value, skidding from 3.3 to 2 cents to the ruble – now lost another 30 percent as the ruble dived to 1.25 cents, or 80 rubles to the dollar. With customers reportedly beginning to hoard goods while firms like Apple and Ikea suspended Russian sales, crisis was as palpable as December’s frost on Red Square.

Embattled, the Russians deployed the monetary artillery, first catastrophically, then effectively. The first measure, a 6.5% interest rate hike from 10.5% to 17%, only made the markets dump the ruble in panic – so much so that within hours, it plunged by 20%. The second measure, selling billions of dollars from Russia’s foreign currency reserves, better impressed the markets, and by Thursday the ruble was back at 60 to the dollar.

Even so, having lost half its value this year, the ruble has just done what it could to alert Russians that their economic, political and strategic leadership might breed disaster.



Analysts spoke a lot this week about the relationship between the collapsing ruble and the oil markets. They were right, considering that oil prices have been nearly halved, spilling from $103 last July to $54 per barrel last Tuesday, when the ruble bottomed out.

In this regard, the markets were voting no confidence in Putin’s 15-year policy of making oil and gas Russia’s economic spine. With energy sales comprising some 70% of Russia’s exports, it takes no economist to understand that the sudden decline in income should entail sharp spending cuts.

Lacking evidence that Moscow is planning such frugality, currency markets assumed Putin intends to take expensive loans and print cheap money, meaning his currency is contagious and must therefore be dumped.

This is how things seemed through the financial markets’ narrow prism.

Yet behind this immediate concern for balance, liquidity and solvency lurks the tragic loss of an opportunity to reinvent Russian history.

IN HIS first years in office, Putin restored Russia’s economic stability and the Kremlin’s political authority, following a turbulent decade that culminated in 1998’s debt default. Putin also seemed to understand the need for economic openness, inviting foreign firms, most notably major automakers, to set up assembly lines across Russia while cutting corporate taxes to as low as 24% – among the world’s lowest rates.

Even so, Putin apparently failed to understand the depth of his country’s economic laggardness. As he saw the situation, if he brought in petrodollars, got some more Russians to assemble cars and appliances, multiplied several million people’s wages and raised consumption – then he had cured Russia’s economy. In fact, this was just the beginning of what needed to be done.

What needed to happen was the use of petrodollars to gradually shrink their own share in national income, by multiplying industrial and agricultural output. The gaps Russia needed to overcome in this regard hark back to Stalin’s mass murder of ranchers in the 1930s, and his forced creation of factories that created a culture of poor work.

Instead, not only did industrial activity remain low, adding up to a measly 1.5% of exports, the message to foreign investors, despite the lenient taxation, was that Russia was a dangerous place for their money.

This writer once boarded a helicopter in Poland with Israeli entrepreneur Shmuel Dankner, who wanted to show the press his role in privatizing the Polish telephone system. As we took off and Warsaw’s faceless apartment blocks gave way to forests, rivers, and rolling hills, I asked him: “Why Poland?” I thought he would say he had some roots there, and maybe even spoke the language, but he said instead: “Because it has reliable courts.”

It was 1996, and similar foreign investors throughout the world were calculating their moves knowing the former East Bloc had great opportunities in store, but also major risks. Like Dankner, most were prepared to take all kinds of risks, provided they knew they would get a fair hearing in a court of law, should disputes arise.

Putin’s message to such private investors was delivered in 2003, when billionaire Mikhail Khodorkovsky was arrested among other businessmen with whom Putin was at odds. The decade which that critic of Putin spent in jail convinced foreigners to peddle their funds elsewhere. The Russian economy’s current image, as a lawless El Dorado held hostage by mafiosos, will take decades to undo, if any such a transformation is ever to transpire.

Historians will likely debate whether scaring off foreign investors was for Putin an aim in its own right, or just a byproduct of his urge to control any source of power, from the media to the judiciary. Either way, as Russia licks its financial wounds, it is clear that a major cause of its crisis is Putin’s obstruction of economic freedom and judicial independence.

Whatever its rationale, there will be no arguing that Putin’s economic policy of pumping oil and cultivating cronies condemned his country to a kind of weakness that could not coincide with imperial adventurism. Yet that is just where he turned.

“WHAT JERUSALEM’S TEMPLE MOUNT is to Jews and Muslims, Crimea is to us,” said Putin last week.

While dismissed by historians as far-fetched, the analogy nonetheless underscores what for Putin has become an obsession, and for his economy a catastrophe. After bullying neighbors from Georgia to Ukraine, at times by closing spigots and at other times by opening fire, Putin’s power game has reached its limits.

Just why Putin attacked Ukraine is debatable, and will remain so for a long time. Was he driven by genuine nationalism? Did he overreact to the West’s snatching of Libya from his bosom, as he saw it? Is he programmed, as a graduate of the KGB, to see what sprawls to his West as one hostile continuum? What is not debatable is that the goals he assessed as within his political reach have since proven to be beyond his economic means.

With soaring interest rates heralding mass layoffs, inflation scratching 10% while the collapsing ruble leaves millions with decimated purchasing power, and the Bank of Russia saying the economy will next year shrink by 4.5%, Putin will have to choose: Retreat somewhere, or be held accountable – even in his own circle.

The pincer movement on Putin is now such that the sanctions have made it hard for the rich to bring money from abroad, interest rates make it hard for the middle class to bring money from local banks, and the fallen ruble makes it hard for him to borrow from the central bank.

Most observers believe Putin will now seek – and the West will happily provide him – a ladder with which to return from the Ukrainian cedar he has climbed. Yet even if such a retreat happens, he will have to get down to the business of building the economy. Otherwise, Russia will get lost not in the shadows of the West of which he is so suspicious, but of his other neighbor: China, whose industrial drive Russia never quite began to emulate.

In the Battle of Tannenberg, the Russians lost because the Germans surprised them with fast rail-borne deployments and agile radio interceptions, and the Russians lacked encoding equipment. It was but a decade after the Russian army had been stunned by an industrially superior Japan. In between these debacles, czarist Russia’s economic weakness rendered its imperial quests hollow, and its battle thirst a disaster.

A century on, this is pretty much Vladimir Putin’s situation.

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